India's Currency Is Falling Fast and Its Central Bank Doesn't Know What to Do

Prop up the currency or the economy?

It's another bad day for the rupee, which dropped another 1.4% to yet another all-time low against the US dollar. Here's a long-term look at the recent weakness in the currency.

Rupee1.png

The decline came as the Reserve Bank of India announced a plan to try to keep yields on long-term Indian government bonds from spiking much further, amid a recent sell-off of the nation's sovereign debt. (When bond prices fall, bond yields rise, and vice versa.)

The RBI announced Tuesday it would spend 80 billion rupees (about $1.3 billion) to buy long-term government bonds, which form an important part of the capital foundation of Indian banks. Rising long-term bond yields erode the bedrock of the banking system, which makes banks leery of lending and hurts growth. Some Indian bank shares have fallen sharply over the last month.

But propping up the banking system with that type of cash injection seems to be reversing the RBI's very recent efforts to strengthen the rupee by sucking rupees out of the system. The FT (paywall) cites a note from a frustrated analyst:

"Over in India, flip-flops by policy makers continue," Rajeev Malik, senior Asia-Pacific economist at brokerage CLSA, wrote in a note. "The latest moves by the RBI are aimed at cleaning up the unintended mess in the bond market from their convoluted and ineffective currency defence. But they still appear unsure of what [growth, rupee, bonds] they want to eventually save."

A leadership shift in the RBI looms amid all this floundering. University of Chicago finance professor Raghuram Rajan is set to take over as head of the central bank in early September. That should provide an opportunity for some sort of policy reset. But straightening out the current melange of RBI policies won't be easy.

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Matt Phillips is a reporter at Quartz, where he writes about finance, markets, and economics.

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